Expanded Ira Opportunities Are Worth Closer Inspection
When President Clinton signed legislation dramatically increasing the minimum wage nationwide Tuesday the nation’s attention focused on the 10 million or so individuals who would be receiving an economic lift.
But what has been largely overlooked are the number of provisions tacked onto the legislation to financially assist millions of other Americans.
Among the more notable is a provision authored by Sen. Kay Bailey Hutchison, R-Texas, that allows homemakers to set aside $2,000 annually in tax-deferred individual retirement accounts.
Those working outside the home already can set aside $2,000 a year in tax-deferred IRAs with certain qualifications. Previously, non-working spouses had been limited to $250 in annual contributions.
Thus, starting with the 1997 tax year, non-working spouses will receive equal treatment and one-income couples will be able to contribute as much as a combined total of $4,000 a year, instead of the current maximum of $2,250.
“We have made the tax code a much more even-handed instrument,” Hutchinson said after the president signed the legislation. “Homemakers are finally getting a fair deal.”
Sacramento financial planner Betty Loftus calls the expanded IRA program a “should-do for many investors who meet the necessary qualifications.”
Investors are much better off having their money compound in an IRA that earns 9 percent than they would be giving 3 percent to Uncle Sam and thus earning 6 percent after taxes, she says.
Loftus warns investors to make sure that the money that’s being earmarked for an IRA won’t be touched until they are age 59-1/2 because of the penalties and taxes that must be paid for early withdrawal.
“If you are concerned that you might have to tap the money sooner, you might be better off investing it outside of a retirement program to give you room for liquidity,” she says.
Additionally, the legislation will help many of the following:?
Car buyers. Buying a higher-priced luxury car will be less taxing. The 10 percent luxury excise tax on automobiles costing more than $34,000 will gradually be phased out.
The tax will drop to 9 percent Aug. 28, and then drop 1 percentage point on Jan. 1 each year until it disappears completely in 2003.
The tax applies to the amount of the price over $34,000. For instance, $6,000 of the price of a $40,000 car would be subject to the tax or a levy of $600.
The luxury tax was able to do what practically no one else could do: it united domestic, European and Asian automakers as well as their dealers in the battle for reform.
College students. The measure reinstates the $5,250 exclusion for employer-provided tuition retroactive to Dec. 31, 1994, and extends it through June 1996 for graduate-level tuition and May 1997 for undergraduate tuition.
Employees of small businesses. Businesses with 100 or fewer employees can now offer employees a simple pension plan. Employees can contribute up to $6,000 annually and employers, on a tax deferred basis, would generally contribute 3 percent of salary. In addition, much of the very complicated red tape is being slashed.
Among the simplified rules are relaxed requirements for determining which employees of a company are “highly compensated” and subject to limits on their benefits.
Another significant change will allow spouses who work for the same company to both enroll in plans; now only one can be a member. The legislation will go into effect Jan. 1. xxxx WHAT THE NEW IRA LAW OFFERS The new laws, signed by President Clinton this week, expand the use of IRAs in several key ways: Higher IRA contributions will be allowed on behalf of non-working spouses. Unemployed taxpayers may make penalty-free withdrawals from their IRAs to pay for health insurance. Taxpayers with high medical expenses may offset these costs by making penalty-free withdrawals from their IRAs.
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